Anthony Randazzo: Housing rebounds, system still unfixed

The median price for an Orange County home this January was $460,000, according to DataQuick. That's up from $370,000 in January 2009, and many people are feeling increasingly optimistic about the housing comeback.

As the housing market resurges, we should note that the underlying problems that helped cause the housing bubble remain largely unfixed, and that this recovery could be built on a foundation of sand.

Fannie Mae and Freddie Mac, for example, are still risking taxpayers' money by providing subsidies to mortgage investors, laying the groundwork for a new housing bubble.

Since being bailed out in 2008, Fannie Mae and Freddie Mac have been propped up by $187 billion in taxpayer money. Together with the Federal Housing Administration, the government enterprises have continued offering subsidized insurance to mortgage investors and are now guaranteeing payment on nine of every 10 mortgages.

Policymakers know eliminating Fannie and Freddie would go a long way in preventing another housing bust, and a new report by a commission of several former government housing officials, including two former secretaries of Housing and Urban Development, Mel Martinez and Henry Cisneros, and former Sen. George Mitchell calls for phasing them out over five to 10 years.

The Bipartisan Policy Center's commission proposed reducing the size of loans that Fannie and Freddie can purchase from private lenders until they can't buy anything at all. This would mean no more transferring of mortgage default risk from investors to the taxpayers.

This approach is a compromise between keeping Fannie and Freddie propped up in perpetuity and shutting them down tomorrow. It allows the market time to adjust as the mortgage giants are phased out.

The commission's plan has a major flaw. It proposes replacing Fannie and Freddie with a "Public Guarantor." This new government entity would not buy mortgages, but it would still offer catastrophic insurance to mortgage investors against another meltdown, meaning taxpayers would still back mortgage investors and could wind up on the hook again.

This amounts to crony capitalism. Want to put your own money in the stock market? Invest at your own risk. Want to buy mortgage-backed securities? Uncle Sam will guarantee you get a return on your investment.

In fairness, the public guarantor system would probably be less distortionary and less crony than the status quo. However, the commission's conviction that the government should promote homeownership is the same attitude that helped create the housing bubble.

The government needs to rid itself of the belief that everyone should own a home. From federal tax breaks to state and local programs designed to encourage homeownership, government at every turn urges people to buy homes.

Homeownership is not for everyone. In many parts of Southern California, for example, it is cheaper to rent than buy. Renting also offers greater flexibility and mobility.

Orange County's rising home prices may appear to be a welcome sight for the economy. But with taxpayers, via Fannie Mae and Freddie Mac, guaranteeing that nearly every mortgage will be paid, there is still significant risk of another housing crisis for everyone – except for the banks and investors who know a bailout is waiting.

Anthony Randazzo is director of economic research at Reason Foundation.

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